Insecurity – broke is, as broke does

An often misunderstood and occasionally strategically abused right between litigants is the right to receive (or obligation to provide) security for another party’s costs of conducting the litigation.

Although not exclusively, security for costs is often the province of appellate Courts because a possibly impecunious corporate party seeking the indulgence (appellant) is obliged to ensure that the other party is not left in a worse position by undertaking a course that may or may not alter the outcome already obtained.

The circumstances which will allow an application for security for costs and the basis upon which it will be granted are subject to some procedural variation between jurisdictions, however there are some long standing principles of law that remain. In determining the requirement for one party to provide security, the Court must undertake an enquiry as to the financial resources of the party. That is because, security for costs is only designed to protect a successful party from an unsuccessful party’s inability to meet an adverse costs order from its own resources.

Many parties and their advisors tend to treat the process as a deeply forensic inquisition into the minutia of the financial affairs of the subject party. In reality however, the Court will attempt to establish on a reasonable basis, whether or not the net resources of the subject party, such as real property, cash and available credit are sufficient to satisfy the best estimate of what an adverse costs order might be.

In cases involving complex financial instruments and litigation of multiple debts in the same proceedings, the unsuccessful party can sometimes find themselves a victim of overwhelming circumstances. This was the case for the corporate appellant in George 218 Pty Ltd -V- Bank Of Queensland Limited.

The company and its director were appealing one aspect of the outcome of several proceedings involving multiple defendants. The spectre of impecuniosity was present owing to the fact that several related entities were in external administration and the individuals involved were the subject of bankruptcy proceedings. Despite significant land holdings in related entities, the appellants had all the hallmarks of being unable to pay their debts.

The respondent, who was seeking the security, in an attempt to drive the nail in, put evidence before the Court regarding information they had obtained from the Personal Property Security Register (“PPSR”) evidencing that the land holdings the appellants proposed to rely on in resisting the application were the subject of security interests.

The Court was not persuaded that the PPSR searches were evidence of an impediment to the appellants’ claiming the land holdings as a financial resource. As it turned out, that was largely not determinative of this particular case because the appellants had made an arrangement to pay the original judgment by instalments and had, at the time of the application, defaulted on that arrangement. It was therefore a pragmatic approach by the Court to making a determination of whether or not the appellants had resources to meet an adverse costs order.

In that regard, the principles have not changed significantly in many years. It is not the role of the Court to investigate the finest details of a party’s financial affairs and reach an expert style opinion on the solvency of that party. That said, when the application for security is in relation to an appeal and the is obvious financial difficulty both for the relevant party and its related entities, there is little need to go much further. There are obvious tactical advantages to having an attacker effectively starved out of the challenge, however Courts are generally reluctant to deny a party the opportunity to ventilate their issues unless the deficiency is obvious.